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Should You Refinance Your Student Loan?

Should You Refinance Your Student Loan?
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By Monday, 09 November 2020 11:59 AM Current | Bio | Archive

Student loans present a major financial challenge for many Americans. Before the pandemic, 44 million Americans held more than 1.6 trillion dollars in student loan debt.

To make matters worse, 48% of students have reported they are borrowing more as a result of COVID-19. In truth, the debt burden from student loans is so heavy that it is causing many people to put off meeting certain financial milestones such as buying a home or having children.

That said, on an individual level, there are ways to mitigate the effect that student loan debt has on your finances. One of those ways is to refinance your student loans.

Why you might consider refinancing

Before getting into the particulars of how to tell if refinancing could be a good fit for you, it's important to go over some of the main reasons why you might want to refinance in the first place. Below are two main drivers behind why many people choose to refinance their student loans.

You can get a better interest rate

Due to the economic uncertainty caused by the pandemic, student loan interest rates are hitting record lows. Although that is not necessarily a good sign for the economy as a whole, it does mean that there is a good chance you might be able to secure a better interest rate on your loans if you choose to refinance.

The big benefit of having a lower interest rate is that you will save money on your monthly payment. By paying a lesser amount each month, you will also pay less over time, and you may even be able to pay down your debts faster.

If your financial situation has improved significantly

The other situation where it might make sense to refinance is if your financial situation has improved significantly since you first applied for your loans. Often, those with the strongest financial metrics — such as a high income and excellent credit score — are given the best rates.

If your financial situation has improved significantly since you first applied, it may be worth refinancing to see if you can qualify for a lower interest rate.

Can you qualify to refinance?

Before you begin refinancing, it's also important to get a better idea of whether you will qualify. In this case, the best course of action is to talk to a lender who can give you specific advice, but here are some of the factors that will affect if you will ultimately be approved.

Credit score: Because student loans are unsecured, meaning they aren't secured with collateral that can be repossessed if you default on the loan, your credit score will be a major determining factor in whether you're approved to refinance. Put simply, it tells lenders if you have a proven history of paying off your debts.

Income: Your lender will also look at your income to verify that you make enough money to keep up with your loan payments each month.

Debt-to-income ratio: Your debt-to-income ratio is a measure of how much money you have coming in each month versus how much has to be paid toward any existing debts. Your lender will use this measure to determine the risk level in approving you to take on another loan. As many people's debt has grown as a result of the COVID-19 pandemic, this is extra important now.

Education requirements: Though it may seem strange, some lenders will not let you refinance if you did not finish your education requirements or obtain a degree.

Co-signer requirements: If you have a poor credit score or don't have much of a credit history at all, you may need to apply to refinance with a cosigner, but only certain lenders allow this.

Alternatives to refinancing

Again, it's absolutely crucial to speak to a lender before deciding whether you can refinance your student loans.

It's important to note, however, that even if refinancing is not a viable option for you, there are other ways that you can make your monthly payments more manageable.

Explore income-driven repayment plans

If you have federal student loans, you may be eligible for an option known as an income-driven repayment plan. With this option, the amount you pay toward your student loans each month is determined by your income and will be limited to a certain percentage of that income. In some instances, this method can be used to significantly lower your monthly payments.

Consider loan consolidation

On the other hand, if you have multiple loans and are sick of juggling multiple due dates and payment amounts, a viable option may be to consider loan consolidation.

With debt consolidation, you simply take out a new loan that is big enough to pay off all of your existing loans. Once they are paid off, you'll only have to worry about making one monthly payment on one loan.

Make extra loan payments

The final option is to keep your student loans as-is and to simply make extra payments on them whenever possible. While this option may not be ideal, it will help you pay off your loans faster than you would if you were only making the minimum payment.

The bottom line

Although student loans are a financial burden for many Americans, there are ways to make them more affordable.

One of those ways is through refinancing your student loans. Use the information in this post to help you determine if you might be a good candidate to refinance your student loans. Armed with this knowledge, you should have a better idea of whether it makes sense to speak to a lender about the options that are available to you.

Dr. Francesca Ortegren, Ph.D. is a Research Associate at Clever Real Estate where she focuses on helping people understand complex data, real estate, finances, business, and the economy by researching various topics, analyzing data, and reporting useful insights for general consumption.

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DrFrancescaOrtegrenPhD
Student loans present a major financial challenge for many Americans. Before the pandemic, 44 million Americans held more than 1.6 trillion dollars in student loan debt.
refinance, student, loans, debt
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2020-59-09
Monday, 09 November 2020 11:59 AM
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